Displaying items by tag: Treasuries

Treasury yields declined on Tuesday as investors grew more confident that an immediate escalation in the U.S.-E.U. trade conflict might be avoided. The 30-year yield fell to 4.984% and the 10-year to 4.475%, coinciding with a rise in stock futures. 

This drop in yields suggests renewed investor demand for government bonds, signaling reduced risk sentiment and a preference for safety. The shift followed President Trump’s decision to delay imposing new tariffs on the European Union, pending further negotiations. 

While E.U. officials expressed optimism about a potential deal, recent trade tensions have already rattled markets, leading to weak demand for U.S. Treasurys in last week’s auction. 

Finsum: Compounding concerns is a major Republican policy proposal moving through Congress that lacks full funding, raising additional doubts about America’s fiscal outlook.

While stock selection often gets the most attention, the true driver of portfolio performance is typically asset allocation, with around 90% of variability linked to how investments are distributed across asset classes. Different asset classes perform well under different economic conditions—stocks might excel in growth periods, while bonds provide stability during downturns. 

Goldman Sachs has analyzed various economic scenarios to suggest optimal asset mixes for maximizing risk-adjusted returns over the next decade. For sluggish growth or stagflation, they recommend a heavier allocation to Treasury bonds and real assets, while minimizing exposure to growth stocks. 

In a scenario of strong growth and low inflation, the maximum allocation to stocks should still be capped around 70%. Ultimately, a diversified mix, including US Treasuries, remains crucial regardless of the economic outlook.

Finsum: Keep in mind the relative risk profiles of these asset classes when constructing your portfolio. 

Treasuries gained momentum following a weaker-than-expected U.S. producer prices report, reinforcing the potential for the Federal Reserve to lower interest rates more aggressively. The two-year yield, which closely mirrors Fed policy expectations, fell by 8 basis points, while the 10-year yield decreased by 6 basis points. 

Market participants are now eagerly anticipating the upcoming consumer price index (CPI) data, which could further influence rate-cut expectations. However, some Federal Reserve officials remain cautious, emphasizing the need for more economic data before supporting any rate reductions.

Despite recent market volatility, with shifts from expectations of a soft landing to a hard landing, uncertainty persists. 

Finsum: Markets thought there was going to be an emergency Fed meeting last week, but look to Jackson Hole for better clarification.

The U.S. dollar's dominance as the global currency could face a challenge from China. In the first quarter of 2024, China sold a record $53.3 billion in U.S. Treasuries and agency bonds, indicating a push towards diversification.

Over the past 17 months, China's central bank has been significantly increasing its gold reserves, raising concerns about a shift away from reliance on the U.S. dollar. This move may be part of a strategy to protect against U.S. sanctions and reflect China’s broader economic ambitions. 

Other countries, including India, Russia, and Turkey, are also reducing their U.S. asset holdings amid concerns over America’s debt and political stability. While the dollar's decline isn't immediate, investors should consider diversifying their assets to navigate potential changes in the global financial landscape.

Finsum: These sorts of shifts could have drastic impact on Treasury prices so investors should monitor international changes.

The first five months of 2024 have featured above-average volatility for fixed income due to inflation continuing to run hot and increased uncertainty about the Fed’s next move. Despite these headwinds, institutional investors have been increasing their allocations to long-duration Treasuries and high-quality, corporate bonds.

One factor is that there is increasing confidence that inflation and the economy will cool in the second half of the year, following a string of soft data. As a result, allocators seem comfortable adding long-duration bonds to lock in yields at these levels. Many seem intent on front-running the rally in fixed income that would be triggered by the prospect of Fed dovishness. According to Gershon Distenfeld of AllianceBernstein, “History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting.” 

For investors who believe in this thesis, Vanguard has three long-duration bond ETFs. The Vanguard Long-Term Bond ETF is composed of US government, investment-grade corporate, and investment-grade international bonds with maturities greater than 10 years. For those who prefer sticking solely to bonds, the Vanguard Long-Term Treasury ETF tracks the Bloomberg US Long Treasury Bond Index, which is composed of bonds with maturities greater than 10 years old. 

Many allocators are adding duration exposure via high-quality corporates given higher yields vs. Treasuries. These borrowers would also benefit from rate cuts, which would reduce financing costs and boost margins. The Vanguard Long-Term Corporate Bond ETF tracks the Bloomberg US 10+ Year Corporate Bond Index, which is comprised of US investment-grade, fixed-rate debt issued by industrial, financial, and utilities with maturities greater than 10 years. 

Finsum: Interest is starting to pick up in long-duration bonds following softer than expected economic and inflation data, which is leading to more optimism that the Fed will cut rates later this year.